The Canadian Securities administrators recently adopted amendments to National Instrument 45-106 Prospectus and Registration Exemptions (“NI”). These amendments relate to, among other things, the “accredited investor” exemption and the requirement of a new Risk Acknowledgement Form (“RAF”).
Individuals other than “permitted clients” (an individual who beneficially owns financial assets having an aggregate realizable value that, before taxes, but net of any related liabilities, exceeds $5,000,000.00) must now complete an RAF.
The individuals who must sign the RAF are those listed in paragraph (j), (k) or (l) of the definition of “accredited investor” in section 1.1 of the NI as follows:
|(j) an individual who, either alone or with a spouse, beneficially owns, financial assets having an aggregate realizable value that, before taxes, but net of any related liabilities, exceeds $1,000,000;|
|(k) an individual whose net income before taxes exceeded $200,000 in each of the 2 most recent calendar years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of the 2 most recent calendar years and who, in either case, reasonably expects to exceed that net income level in the current calendar year;|
|(l) an individual who, either alone or with a spouse, has net assets of at least $5,000,000;|
The RAF must be signed at the time the individual purchases securities in reliance on the accredited investor exemption. The signed RAF must be kept by the issuer for 8 years after the trade.
The RAF is essentially a warning to the investor that the investor may lose money. For example, below is some of the content that must be included in the form:
The RAF must disclose the specific category of accredited investor under which the purchaser qualified. It identifies the key risk associated with the purchase. For example the RAF states:
- This investment is risky.
- Risk of loss – you could lose your entire investment of $ .
- Liquid risk – you may not be able to sell your investment quickly or at all.
- Lack of information – you may receive little or no information about your investment.
- Lack of advice – you will not receive advice from a salesperson about whether this investment is suitable for you unless the salesperson is registered. The salesperson is the person who meets with you, or provides information to you about making this investment.
The goal of the RAF is to ensure that investors clearly understand the risk involved with their investment. Issuers must use the proper the RAF in all applicable circumstances.